Reference no: EM132980289
Problem - On January 1, 2019, Davao de Oro Company purchased bonds with a face amount of P5,000,000. The entity paid P4,600,000 plus transaction cost of P142,000 for the bond investment. The business model of the entity in managing the financial asset is to collect contractual cash flows that are solely payment of principal and interest and also to sell the bonds in the open market. The bonds mature on December 31, 2021 and pay 6% interest annually on December 31 each year with 8% effective yield. The bonds are quoted at 105 on December 31, 2019 and 110 on December 31, 2020. The bonds are redeemed at face amount on December 31, 2021.
Required -
I. 1. Prepare an amortization table for the discount.
2. Assuming that half of the bonds were sold on July 1, 2020 at 105 plus accrued interest, provide the following:
A. Journal entries for the year 2020.
B. Compute the gain or loss on sale from selling the bonds.
C. Continue the amortization from the selling date until maturity date.
II. Assuming that Davao de Oro Company applies the fair value option.
1. Assuming that half of the bonds were sold on July 1, 2020 at 105 plus accrued interest, provide the following:
A. Journal entries for the year 2020.
B. Compute the gain or loss on sale from selling the bonds.
2. Prepare the journal entries from 2019 to 2021 taken into the consideration reflected in requirement 1 of the situation II.
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